Hollywood back from the brink

Entertainment dealmaking poised for a comeback

When Variety ran its Dealmakers Impact Report last September, the financial world was on the brink of collapse. This time around, it seems to be on the verge of recovery.

But although dealmaking has slowed down, it has hardly ground to a halt, as shown by the activity chronicled in this report.

Nevertheless, “The volume of deal flow is off,” says an entertainment financier, “and several banks have left the market, especially satellites of foreign banks.”

One casualty has been the coin available for pre-sales, which over the years has been a major source of funding for indie films. “A chasm has opened up between pre-sales proceeds and film budgets,” says this financier.

On a broader level, a dealmaking environment that was once awash in money and easy credit is now seeing its economic underpinnings shrink. Talent that had grown accustomed to lucrative remuneration is finding it more difficult to command the multifigure fees of the recent past.

“Look at the amount of money that came into the film industry from private equity and hedge funds,” says Jay Cohen, head of film financing and packaging at the Gersh Agency. “When the stock market crashed and the economy took a hit, they pulled out from the film business and focused more on core investments. That affected the domestic product supply because the studios didn’t have all that outside money. It shrank the market.”

Talent agencies have been caught in the middle. “The cost structure of the business has decreased, but producers are telling us that the agencies still haven’t gotten with the program with respect to their clients,” says another financier.

Last year, Variety‘s Dealmakers issue focused on how agencies — in the face of the WGA and SAG strikes, de facto and otherwise — were diversifying into such strike-resistant areas as music, publishing, reality TV and digital. This year their story is not one of diversification but of consolidation.

It now looks like the market will improve, but it won’t return to its profligate ways anytime soon. “There was more liquidity from 2004 to 2007 than probably at any other time in the history of our country,” says Stephen Prough of investment bank Salem Partners. “In the future, standards will be higher. Investors are demanding a greater return on their money.”

But one thing Hollywood has always had going for it — in both good times and bad — is its glamour. For years it has attracted outside investors who enjoy rubbing shoulders with showbiz types. And while any investment or acquisition is based on certain financial expectations, companies will sometimes pay something extra to make a deal.

“When buyers become desperate to buy something for competitive reasons, it creates a premium in the bidding process,” says Mark Patricof, co-founder of Mesa, a merchant bank. “In the entertainment business, that transaction … is more emotional. (There’s) a level of passion (that can lead to) an incremental price for the deal.”

Patricof believes things are about to pick up. “You’re going to see a lot of big deals happen in the next 12 months,” he says. “There will be cable deals, … digital deals, and the IPO market will really open up.”

And now Comcast is making the game-changing acquisition of 51% of NBC Universal.

Any business recovery, however, will occur against a backdrop of permanent technical change. There is no going back to the predigital era, when physically distributed films drew patrons to theaters and appointment TV viewing lured advertisers into auds’ living rooms without challenge or question.

“Traditional media are in a state of dire retrenchment as a prelude to complete collapse,” says Bob Garfield in his new book “The Chaos Scenario.” He backs this up with shocking examples of shortfalls and fiascos among media companies failing to understand the impact of new technology not just on the means of production and distribution but — more significantly — on consumer behavior.

But the good news is that those consumers will always want to be entertained and the creative community will always fill that need. And where there’s entertainment, there are deals.